Introduction
With all of these market breadth charts,
the usual technical analysis techniques can be applied. Major market rises
or falls rarely occur without prior warning. Usually subtle changes can
be observed in the technical indicators some time before these occurrences
become apparent. When reading these charts, keep an eye on overbought /
oversold conditions as well as trend. Lower tops in the waves will indicate
loss of strength in the move, but not necessarily trend change.
The intention of these charts is to help
guide the trader or investor to buying / selling opportunities, and to
help them recognize current risk levels. Individual stock analysis and
fundamentals are also important to minimize risk. Please become accustomed
to learning the quirks of these indicators before attempting their use as trading tools.
We have also taken the liberty of applying many of the calculations to volume analysis.
Percentage Indices
The Percentage Indices measure the percentage
of stocks above their own moving averages. They can be used to measure
the overall market as well as any group of stocks, making useful tools
for sector analysis.
These are some of the most reliable tools
we have at our disposal because they identify periods of high and low risk.
As with any percentage charts, they are confined to travel in a range between
0 and 100. Downturns from high levels suggest defensive action. Upturns
from low levels suggest offensive action. Strongly overbought conditions
occur at readings over 70, strongly oversold conditions occur at readings
below 30. In some cases the charts may stall at around the 50% level before
continuing or changing direction.
Like any chart, these are open to interpretation.
Rises from very low levels are better buying opportunities and have less
risk attached than rises from closer to 50%. Falls from high levels are
usually the best opportunity to profit (if you have bought low).
When applying the measures to small samplings
of stocks, we have added exponential constants to smooth the chart action.
Ideal strong trends are identifiable when the shorter term % indices operate
above the longer term as in the case with multiple moving average systems.
The difference here is the application to market breadth.
Divergence To Mean
The Divergence to Mean measures a mid-term
trend relative to a long-term trend with the figures derived from advance
decline data. Dips to oversold are buying opportunities. The DTM is not
intended to measure the overall trend, rather oscillations around it. The
main purpose of the DTM is to reveal how far the market has strayed from
average. The basic signal is the cross of the zero line. Also divergence
from the price index can be seen in a similar fashion to observations in
a Relative Strength Index.
Adv/Dec Haurlan 1%, 5%, and 10% Indices
The Haurlan indices are oscillators with
essentially the same calculation as would be used in the standard advance
decline line. The daily declining issues are subtracted from the daily
advancing issues and added to yesterdays result. In this case, weightings
are added to the latest numbers so as market sentiment changes, this is
reflected in the chart. The various weightings carry relevance to short
term, mid term, and long term trends.
The basic signal of the 5% & 10% indices
is the crossing of the zero line. These charts are usually displayed together,
with first signals to note being the 10% line crossing the 5% line.
The 1% Index is useful to identify primary
trend and can be analysed as such. Trendline breaks, compressions, support
and resistance can be observed in the chart.
Adv/Dec McClellen Oscillator
The McClellan Oscillator is calculated
from advance decline data. The data is the result of the difference of
2 exponential moving averages. It is used to measure the first buying or
selling pulse, the strength of the first move often taking it to an extreme
reading. When the first move loses momentum, the chart will start a move
back, lower tops becoming evident. Its major use is to help us identify
the short-term rhythms. The chartist may wish to note time scale intervals
in major tops and bottoms. If the chart hovers around zero, this expresses
an indecisive market. A major break through the zero line can signal the
beginning of trend changes, but this would need to be confirmed by the
slower moving charts.
Adv/Dec Summation Index
The Summation Index is the cumulative
data from the McClellan Oscillator calculated in a similar fashion to the
advance decline line where today's result is added to yesterdays. In this
case we display the data as an oscillator. The Summation Index trends
in a smooth action. It's main purpose is to help refine market breadth
by showing general trend together with overbought / oversold conditions.
10/50 Day Buying Pressure %s
The %Buying Pressure is calculated from
advance decline data and is another confirming indicator. Data is calculated
by measuring advancing minus declining issues, divided by total changed
issues (unchanged issues are ignored). Two simple moving trend lines are
then generated and plotted. The short wave measures the first buying/selling
pulse. If strength continues, the longer wave will confirm the trend.
10/50 Day Selling Pressure %s
As per the 10/50 Day Buying Pressure %s,
except applied to selling, therefore inverse.
Short Term Summary Index
The Short Term Summary Index is a compilation
percentage index. The plot compares all of today's indicators against
their position 10 days prior. The charts returning positive figures are
added, each indicator being worth a single point. This is then divided
by the total number of charts measured, the resulting figure expressed
as a percentage. The 10-day average is then calculated and charted. It
is a very fast moving line shifting quickly between oversold and overbought
levels. This sensitive line indicates change in short-term sentiment, and
may be of use to day traders. The STSI main purpose is to further refine
market breadth, giving us more clues to likely market changes. For example,
if the seasoned chartist notices that other indicators are at extremely
oversold conditions, he or she may wish to initiate buying when the STSI
and STSI 10 Day move off their base positions. This should get you close
to stop out conditions if the market sours again.